FHA Underwriting Guidelines: Fact, Fiction and Urban Legend
by Ben Nicolas
on Thursday, April 23rd, 2009 at 8:38pm.
There are alot of misconceptions surrounding FHA within the Real Estate Industry. Especially from people that have been in the industry for a long time. During the height of the "Mortgage Bubble" no one used FHA because of the relative difficulty in closing them. HUD realized this and revamped the program in significant ways in order to make FHA a more competitive program within the marketplace. These modernization efforts combined with the dissappearance of the Secondary Market for non-agency products and the simultaneous tightening of the Fannie/Freddie conventional guidelines has placed FHA back on top as the financing product of choice for Residential 1-4 unit purchase transactions and high ltv refinances. I'll try to address some of these misconceptions here and give people a better understanding of what to expect from an FHA loan transaction.
FHA underwriters nit pick appraisals more than conventional underwriters. FICTION With FHA, property has to have stove in it when appraised otherwise they are basically just looking to be sure that property is liveable when borrower moves in with out any costly capital improvements being required for basic living requirements and no basic safety hazards.
I don't want my seller to accept an offer from an FHA buyer because FHA will require that the seller pay certain closing costs. FICTION Aside from tax service fee (<$100) there are no closing costs that buyer can't pay anymore. Prior to recent modernization there used to be many closing costs seller had to pay, not the case anymore.
FHA loans take much longer to underwrite and close compared to conventional loans. URBAN LEGEND while this may have been true in the past in todays 2009 FHA marketplace, FHA loans can be underwritten and closed within the same time frames as conventional if not sooner. Anyone that has had a deal held up or killed completely trying to get Mortgage Insurance (MI) for a refi or purchase over 90% can attest to this.
FHA underwriting guidelines are more strict than conventional. FICTION Conventional Guidelines are more restrictive than FHA and they are continually tightening. That isn't even the problem, the problem with conventional is that not only does the borrower and property have to conform to the lender & Fannie/Freddie guidelines but you have to conform to the Mortgage Insurance company guidelines as well and this is where some of the most restrictive guidelines on conventional loans are coming from.
Update: 7/1/09: Reality of the current market in SoCal Real Estate is that unfortunately there are alot of listing agents that seem to shy away from FHA offers. I my opinion as long as listing and buying agent are knowledgeable about the general appraisal guidelines for FHA and lender has property pre-qualified the buyer there should be no problem closing FHA loans within a 30 day escrow time period. Click here to get some opinions on this from other agents on Trulia